Tuesday, November 30, 2010

Investors sold off government bonds from Spain, Portugal and Italy on Tuesday amid worries that Europe's debt crisis has not been contained by Ireland's bailout but will force more expensive rescue efforts.

The yields on Spain's 10-year bonds jumped as high as 5.7 percent, a euro-era record difference of 3.05 percentage points against the benchmark German 10-year bond. That compared with 2.67 points on Monday and below 2.00 points just a week ago.

The spread on Italy's 10-year bond, meanwhile, reached 210 points, also the highest since the launch of the euro, before easing back somewhat. Portugal, whose yields soared last week, likewise saw its spread edge higher.

"Ireland's bailout package has clearly failed to stop the rot in the eurozone markets and if anything it has focused attention on other countries in the periphery," said Mitul Kotecha, analyst at Credit Agricole CIB.

The continued market turmoil "will come as a bitter blow to European officials who had hoped that it would help to turn sentiment around," he said.

492: The number of days since the average borrower in foreclosure last made a mortgage payment.

Banks can’t foreclose fast enough to keep up with all the people defaulting on their mortgage loans. That’s a problem, because it could make stiffing the bank even more attractive to struggling borrowers.

In recent months, the number of borrowers entering severe delinquency — meaning they missed their third monthly mortgage payment — has been on the decline, falling to about 700,000 in October, according to mortgage-data provider LPS Applied Analytics. But it’s still more than double the number of foreclosure processes started.

As a result, banks are taking progressively longer to foreclose. The average borrower in the foreclosure process hadn’t made a payment in 492 days as of the end of October, according to LPS. That compares to 382 days a year ago and a low of 244 days in August 2007.

In other words, people who default on their mortgages can reasonably expect, on average, to stay in their homes rent-free more than 16 months. In some states such as New York and Florida, the number is closer to 20 months.

That’s a meaningful incentive, and it’s likely to grow unless banks manage to boost their throughput. Speeding up the process won’t be easy, as demonstrated by the banks’ continuing legal troubles related to robo-signers, bank employees who signed foreclosure affidavits without properly checking the required loan documentation.

Riot police in Greece, where a fiscal crisis broke out earlier this year.

Last year the consensus opinion was that we are all Keynesians now. Virtually everyone in the commentariat believed that John Maynard Keynes’s solution for the Great Depression—heavy government spending to resuscitate the economy—was also the answer to today’s global downturn. The first cracks in the consensus appeared with the outbreak of the fiscal crisis in Greece earlier this year. Across the developed world, critics began to argue that government spending had reached the point of diminishing returns, and was producing an anemic recovery that mainly benefited special-interest groups. And the electorate listened. From Europe to the United States, as voters started to reward candidates focused on fiscal discipline and less government intervention, Keynesianism quickly fell out of favor.

One key exception was U.S. Federal Reserve chairman Ben Bernanke. Dissatisfied with the gradual recovery and a high unemployment rate, he let it be known that he thought more stimulus was in order, and realizing that was not in the congressional cards, he decided to take monetary activism to a new level by offering an open-ended commitment to pump as much money into the system as required to meet the Fed’s dual mandate of maximum employment and price stability. This is the first time a Fed chairman has explicitly stated that monetary policy can turbocharge an economic recovery. Bernanke says he is doing everything Milton Friedman would have had the Fed do. Friedman, the father of monetarism, argued that the Great Depression was largely the result of a major contraction in money supply, and that such a severe economic outcome could have been avoided had the Fed held the money supply stable.

The public doesn’t buy it. There’s a growing backlash against the Fed’s monetary activism, for two reasons. It is increasingly clear that the Fed can print all the money it wants to but has no control over where it ends up. Ever since the Fed stepped up talk of quantitative easing this summer, the prospect of easy money has driven up prices of commodities and emerging-market stocks, and Wall Street is abuzz with talk of the “next bubble.” Second, monetary activism suffers from the same fundamental flaw as Keynesianism, in that it protects inefficient players instead of injecting renewed vigor into the economy. In a telling statement of the Fed’s thinking, New York Fed member Brian Slack recently said that, with luck, quantitative easing will work by keeping “asset prices higher than they should be,” as that adds to household wealth. This is why stimulus can be so unpopular: it often benefits the rich (who own a disproportionate share of inflating assets such as stocks) at the cost of the poor (who are hurt most by the related rise in food and energy prices).

It seems that the US is now the only country clinging to Keynesianism... unfortunately austerity will come to the US as it has to other countries and the price for the wanton consumerism and entitlements of past years will be paid.

If you are among the 2 million Americans who lost their home to foreclosure in 2009 or have been struggling to make ends meet, maybe you’re just in the wrong line of work (assuming you have a job).

There is one segment of the workforce that has seen its aggregate wealth increase by 16 percent. It has managed this feat, moreover, despite employer evaluations so negative as to be immediate grounds for dismissal in any other industry. That group is Congress.

A recently released study by the Center for Responsive Politics reveals that between 2008 and 2009, members of the U.S. House of Representatives enjoyed a 19-percent increase in wealth, from $645,503 to $765,010. During the same period, senators settled for a more modest raise of 5 percent, from $2.27 million to $2.38 million.

The report further shows that nearly half of all federal lawmakers—261—are millionaires, a financial distinction shared by only 1 percent of the general populace. Of those congressional millionaires, 55 have an average calculated wealth of $10 million or more, and 8 are in the exclusive $100 million-plus club.

Lest you think the inequity follows party lines, it is worth noting that the richest Congress member is a Republican, Rep. Darrell Issa of California, who in 2009 reported holdings in excess of $303.5 million. Next comes fellow Californian, Rep. Jane Harman, a Democrat, who reported $293.4 million. Sen. John Kerry (D-MA) finishes in third place with a mere $238.8 million.

Monday, November 29, 2010

The vagueness of the statements made last night still gives EU and national politicians plenty of room to manouvere in future crises. These may not take long to appear – as bond market investors have already made clear their worries about other countries, namely Spain, Portugal and Belgium.

In the first four months of next year, the combined refinancing requirement for the Spanish government and banks is €72bn, while the Belgian government must replace €62bn of its bonds in 2011 – more than Ireland and Portugal combined.

The hope is that markets will improve over the next months and that securing new funding will prove possible, but the recent rhetoric from European politicians about "haircutting" bondholders in Irish banks is already starting to lead to a buyers' strike among investors.

Sunday, November 28, 2010

Never before in history has a superpower lost control of such vast amounts of such sensitive information -- data that can help paint a picture of the foundation upon which US foreign policy is built. Never before has the trust America's partners have in the country been as badly shaken. Now, their own personal views and policy recommendations have been made public -- as have America's true views of them.

Such concerns were particularly acute among investors in the UK and Germany – exposed to €110bn and €102bn of Irish bank debt respectively. The third-most exposed country, incidentally, is the United States.

The centre of the turbulence on Europe's financial markets shifted last week, though, to Spain and Portugal, causing their governments' borrowing costs to soar. The reason is that the rescue package being finalised between Dublin, the European Union and the International Monetary Fund may impose "haircuts" on all those who leant money to banks in the Republic – not just the "junior creditors".

That would all but guarantee the same principle being applied elsewhere – a prospect that sent banking stocks spiralling downward across the eurozone's "periphery", as well as the UK, piling even more financial pressure on the governments so desperately standing behind them. The yield on 10-year Portuguese debt soared to 7pc, as unions staged the country's biggest strike in 20 years, while Spanish yields spiked above 5pc.

Saturday, November 27, 2010

Ireland's banks were hit with downgrades Friday — one to junk bond status — as speculation mounted that an EU-IMF bailout of Ireland could require senior bondholders to help cover the massive losses.

Prime Minister Brian Cowen saw his own hold on power slip another notch, as his ruling Fianna Fail party lost a special election for a long-empty seat in parliament. The winner vowed to force Cowen from office before he can pass an emergency 2011 budget being demanded as part of the international rescue.

The New York-based Standard & Poor's credit ratings agency said it was lowering Anglo Irish Bank six notches to a junk-bond B grade. It also cut the ratings on Bank of Ireland one notch to BBB+, and downgraded both Allied Irish Banks and Irish Life & Permanent one notch to BBB.

The agency said bonds issued by Anglo are particularly at risk of being discounted as part of an euro85 billion ($113 billion) rescue mission by the European Union and the International Monetary Fund. It says Ireland "may be forced to reconsider its current supportive stance toward Anglo's unguaranteed debt."

Thursday, November 25, 2010

Elizabeth Warren was the first senior Obama administration official to recognize the potentially incendiary impact of a bill that would have made it significantly easier for mortgage companies to foreclose on homes, and her subsequent warnings played a crucial role in persuading the President to veto the measure, according to freshly released documents and people familiar with the deliberations.

The disclosure that Warren was instrumental in halting a bill that would have streamlined the foreclosure process comes as she confronts fierce criticism from Republicans on Capitol Hill for the way she was appointed to construct a new consumer financial protection bureau, and characterizations that she is inclined to take an overly punitive tack with Wall Street.

A long-time advocate for greater regulation of the financial system and a prominent critic of predatory lending, Warren now finds herself at the center of an intensifying debate over the relationship between the Obama administration and the business world.

Wednesday, November 24, 2010

Muni bonds are hardly ever talked about. They’re the classic “widows and orphans” investment. They’re issued by states, schools, and other municipalities which have historically rarely defaulted. They pay a steady rate of interest. The interest is usually tax free.

That all changed this week.

In classic it doesn’t matter until it matters groupthink, investors woke up to the disastrous financial quagmires governments at all levels have gotten themselves into. And they ran for the exits.

Municipal bond investors yanked $3 billion out of muni bond funds last week. That was the biggest sell-off since 1992.

Portugal is bracing for an increase in speculative trades against it as some investors expect it to be the next European nation to need a bailout now that Ireland is taking a massive loan to prop up its banks.

During the past decade of meager economic growth of around 1 percent a year, the Portuguese have been living beyond their means, borrowing money to finance sacred welfare entitlements and private spending while protecting jobs through outdated labor laws that ignored changes in market conditions.

International investors, spooked by the scale of Greece's bailout requirements in May and Ireland's banking failures, are taking a closer look at the finances of eurozone countries and they don't like the look of Portugal's accounts, says Emilie Gay, an analyst at Capital Economics in London.

Investors are "looking for their next target" and Portugal fits the bill, Gay said Monday. Capital Economics predicts Portugal will have to ask for help by early next year, when it has to begin refinancing billions of euros (dollars) in government bonds. Others predict the crunch may come sooner.

The next serious crisis for Americans could be a lack of coal to run the power plants that light up computer screens, heat microwave dinners and turn on the big-screen televisions, according to experts on the issue.

The situation is that hundreds of millions of people in nations like China are moving rapidly from the Stone Age to the 21st century as American dollars have flooded that part of the world, and officials have been struggling frantically to make enough power to run all of the gadgets the new lifestyle includes.

Similar circumstances also are developing in India and places like Indonesia, and the demand is sending the expense of coal through the ceiling, making relatively insignificant President Obama's promise during his 2008 election campaign that he wanted to regulate those who build coal mines and coal-fired power plants until they were bankrupt.

Demand has surged to such levels that in some places, workers have been giving up their regular jobs to go and hand-dig coal from the ground and haul it to market in old bathtubs.

The experts suggest that Americans even could see power shortages because of the demand, and resulting price, of coal.

Bill Heid, chief of Solutions from Science, which provides answers for consumers concerned about the reliability and availability of energy, says some power producers, in fact, are being forced to pay prices for coal that are forcing them into a loss.

Tuesday, November 23, 2010

China started allowing the yuan to trade against the Russian rouble in the interbank market from Monday as policymakers promote the currency's use in global trade and finance.

The move will help "facilitate bilateral trade between China and Russia and help develop yuan trade settlements," according to a statement published on the website of the China Foreign Exchange Trade System (CFETS), a subsidiary of the People's Bank of China.

The central bank calculates the daily reference rate by taking an average of quotes from commercial banks designated to act as market makers, the statement said.

"The pace of internationalizing the yuan is accelerating," said Zhao Qingming, a senior analyst in Beijing at China Construction Bank Corp, the country's second-largest lender.

"The direct trading between the yuan and the rouble will help expand trade settlements in the two currencies."

China is allowing greater use of its currency for cross-border transactions to reduce reliance on the US dollar, after Premier Wen Jiabao said in March he was "worried" about holdings of assets denominated in the greenback. Purchases of US currency to contain yuan gains contributed to a $194 billion increase in the nation's foreign-exchange reserves in the third quarter, boosting the total to a record $2.65 trillion.

The offices of Level Global Investors LP and Diamondback Capital Management LLC, hedge funds founded by alumnus of SAC Capital Advisors LLC, were searched by Federal Bureau of Investigation agents.

The FBI said it had searched the offices of both firms. Federal law enforcement agents also executed a search warrant at the offices of Boston-based Loch Capital Management, according to a person familiar with the probe who declined to be identified because the matter isn't public.

Steve Bruce, a spokesman for Stamford, Connecticut-based Diamondback, declined to comment. Andy Merrill, a spokesman for Level Global, based in Greenwich, confirmed the FBI had searched the hedge fund's offices.

"We are cooperating fully with the authorities," Merrill said in an e-mailed statement.

Sunday, November 21, 2010

The dollar may fall below ¥75 next year as it becomes the world’s “weakest currency” due to the Federal Reserve’s monetary-easing program, according to JPMorgan & Chase Co.

The U.S. central bank, along with those in Japan and Europe, will keep interest rates at record lows in 2011 as they seek to boost economic growth, said Tohru Sasaki, head of Japanese rates and foreign-exchange research at the second-largest U.S. bank by assets.

U.S. policy makers may take additional easing steps following the US$600 billion bond-purchase program announced this month depending on inflation and the labor market, he said.

“The U.S. has the world’s largest current-account deficit but keeps interest rates at virtually zero,” Sasaki said at a forum in Tokyo yesterday. “The dollar can’t avoid the status as the weakest currency.”

The Fed said on Novenebr 3 it will buy US$75 billion of Treasuries a month through June to cap borrowing costs. The central bank has kept its benchmark rate in a range of zero to 0.25% since December 2008. The Bank of Japan on October 5 cut its key rate to a range of zero to 0.1% and set up a ¥5 trillion (US$59.9 billion) asset-purchase fund.

The greenback declined to post-World War II low of ¥79.75 yen in April 1995. The U.S. currency has declined against 12 of its 16 most-traded counterparts this year, according to data compiled by Bloomberg.

There’s no need for any monetary tightening in the U.S. as even prolonged easing won’t heighten inflationary pressures with the balance sheets of banks and households still hurting from the fallout of the global financial crisis, Sasaki said.

Ten-year Treasury yields may decline to around 2.25% over the next year, and their premium over similar-maturity Japanese yields won’t widen, he said. The benchmark 10-year Treasury yielded 2.89% today.

The world economy is likely to expand 3% next year amid the extra liquidity provided by central banks, “repeating a pattern from early 2002 to the end of 2004” when improving risk appetite boosted stocks and commodities and the dollar fell 25% against the yen, Sasaki said.

An area of focus of the three-year investigation are so-called "expert networks", or conversations between investors and former and current employees of companies they are considering investing in.

Wall Street is involved in what may become one of the biggest investigations in its history

Though widely used in the US, the networks are not supposed to pass on confidential information about the companies.

The investigation by federal prosecutors in New York, the FBI and the Securities and Exchange Commission is examining whether these networks were used to generate millions of dollars through trading on insider information, according to a report in the Wall Street Journal.

Friday, November 19, 2010

The Too Big To Fail banks will play a crucial part in this game. See, the problem with the American Zombies is, they weren’t nationalized. They got the best bits of nationalization—total liquidity, suspension of accounting and regulatory rules—but they still get to act under their own volition, and in their own best interest. Hence their obscene bonuses, paid out in the teeth of their practical bankruptcy. Hence their lack of lending into the weakened economy. Hence their hoarding of bailout monies, and predatory business practices. They’ve understood that, to get that sweet bail-out money (and those yummy bonuses), they have had to play the Fed’s game and buy up Treasuries, and thereby help disguise the monetization of the fiscal debt that has been going on since the Fed began purchasing the toxic assets from their balance sheets in 2008.

But they don’t have to do what the Fed tells them, much less what the Treasury tells them. Since they weren’t really nationalized, they’re not under anyone’s thumb. They can do as they please—and they have boatloads of Treasuries on their balance sheets.

So the TBTF banks, on seeing this run on Treasuries, will add to the panic by acting in their own best interests: They will be among the first to step off Treasuries. They will be the bleeding edge of the wave.

It pains me to inform you, Mr. President, but the Treasury Department, Board of Governors of the Federal Reserve, and Securities and Exchange Commission (the trio that has been variously distracted minting trillions in currency, trading cash for trash with Wall Street, surfing for porn, or mishandling multiple voluminous tips on Bernie Madoff’s Ponzi scheme) have misplaced your memo or, as many suspect, take their marching orders not from you but from Wall Street -- perhaps because they perceive that this is where you take your orders too.

Wednesday, November 17, 2010

As European Union financial leaders meet today to discuss the ongoing Irish debt crisis, they are expected to renew their increasingly forceful calls for Ireland to accept EU-led bailouts. The EU is concerned that Ireland's debt crisis, if left unaddressed, could repeat the continent-wide economic damage of Greece's earlier crisis. But Irish officials, wary of the strings likely to come attached to an EU bailout, are resisting the pressure. Here's what both sides are thinking and what experts have to say about it.

"There is a really remarkable, rapid shift of power and influence from the United States to China," Mr. Soros said, likening the U.S.'s decline to that of the U.K. after the Second World War.

Because global economic power is shifting, Mr. Soros said China needs to change its focus. "China has risen very rapidly by looking out for its own interests," he said. "They have now got to accept responsibility for world order and the interests of other people as well."

Mr. Soros even went so far as to say that at times China wields more power than the U.S. because of the political gridlock in Washington. "Today China has not only a more vigorous economy, but actually a better functioning government than the United States," he said, a hard statement for him to make because he spent much of his life donating to anti-communist groups in Eastern Europe.

Tuesday, November 16, 2010

The ongoing "turmoil" roiling megabanks and their faulty home foreclosure practices may represent deeper, more systemic problems regarding the origination, transfer and ownership of millions of mortgages, potentially putting Wall Street on the hook for billions of dollars in unexpected losses and threatening to undermine "the very financial stability that the Troubled Asset Relief Program was designed to protect," a government watchdog warns in a new report.

Recent revelations regarding mortgage companies' use of "robo-signers" when processing foreclosure documents "may have concealed much deeper problems in the mortgage market," according to the Tuesday report by the Congressional Oversight Panel, an office formed to keep tabs on the bailout.

Disclosures by big banks that they employed people whose sole job was to essentially rubber-stamp foreclosure documents without reading them or verifying basic facts led firms like JPMorgan Chase, Wells Fargo and Bank of America to halt home repossessions beginning in late summer and early fall.

In turn, all 50 state attorneys general, federal prosecutors and a host of federal agencies began probing exactly what went wrong, and whether the use of robo-signers represented a one-time mistake or if they're emblematic of broader legal shortcuts taken to cut costs and disguise other shortcomings. The industry is fighting to calm regulators, investors, and members of Congress by arguing the revelations represent isolated cases that are being quickly resolved.

President Obama came away from the Korean trade negotiations last week looking much diminished. "U.S. Wields Less Clout at Summit" was the typical headline in the Wall Street Journal.

All this was attributed to many factors -- the slow recovery of the economy, the failure of Keynsian spending, Obama's election losses or the Federal Reserve's egregious attempts to promote trade advantages by weakening the dollar. Meanwhile, the Koreans refused to be cowed, saying the fault lay with the U.S., which hadn't given them enough to review the revisions made in the original agreement struck with President Bush.

Much is obviously due to the President's egotism. As Charles Krauthammer pointed out on Fox News, "Obama constantly feels compelled reinvent the wheel." He can't accept anything from previous Presidents but must put his personal stamp on everything. Thus, he felt compelled to rewrite a perfectly suitable trade agreement handed him by the Bush Administration -- and missed a deadline in the process. Meanwhile, Bush was winning loads of admiration by refusing to say a single unkind word about Obama during his book tour --- even as the new President has spent his entire two-year term blaming everything on his predecessor.

If you really want to see one of the underlying causes for America's diminishing role in the world, however, take a look at another set of negotiations taking place in Washington right now between Korea and the U.S. over the 1974 Nuclear Fuel Treaty due for renewal in 2014.

Monday, November 15, 2010

Unless the ECB takes fast and dramatic action, it risks destroying the currency it is paid to manage, and allowing a political catastrophe to unfold in Europe.

If mishandled, Ireland could all too easily become a sovereign version of Credit Anstalt - the Austrian bank that brought down the central European financial system in 1931, sent tremors through London and New York, and set off the second deeper phase of the Great Depression, the phase when politics turned ugly.

“Does the ECB understand the concept of contagion?” asked Jacques Cailloux, chief Europe economist at RBS. Three EMU countries have already been shut out of the capital markets, and footloose foreign creditors hold €2 trillion of debt securities issued by Spain, Portugal, Ireland and Greece.

Millions of Americans have no idea what Quantitative Easing is or how it will effect them personally. That’s why Wednesday’s announcement that the Fed will purchase another $600 billion in US Treasuries merely reinforced feelings of helplessness and a sense that government spending is out-of-control. Unfortunately, Ben Bernanke’s rambling explanation of QE2 in a Washington Post op-ed on Thursday only added to the confusion. The article is loaded with half-truths and omissions that are meant to mislead the public about how the program works and what the Fed’s real objectives are. It’s another missed opportunity by Bernanke to come clean with the people and let them know what policies are being enacted in their name. Here’s an excerpt from the article:

“The Federal Reserve’s objectives — are to promote a high level of employment and low, stable inflation. Unfortunately, the job market remains quite weak; the national unemployment rate is nearly 10 percent, a large number of people can find only part-time work, and a substantial fraction of the unemployed have been out of work six months or longer. The heavy costs of unemployment include intense strains on family finances, more foreclosures and the loss of job skills…..Low and falling inflation indicate that the economy has considerable spare capacity, implying that there is scope for monetary policy to support further gains in employment without risking economic overheating. The FOMC decided this week that, with unemployment high and inflation very low, further support to the economy is needed…..the Federal Reserve has a particular obligation to help promote increased employment and sustain price stability. Steps taken this week should help us fulfill that obligation.”

Bernanke mentions employment/unemployment 5 times in the first 3 paragraphs to give the impression that QE is about creating new jobs. But everyone knows that’s baloney. If Bernanke was really worried about jobs, he would have appealed to Congress for a second round of fiscal stimulus in his speech, which he didn’t, because he remains hawkish on deficits like his colleagues in the GOP-led congress.

Friday, November 12, 2010

Nobel Prize-winning economist Joseph Stiglitz, dismissing the Federal Reserve’s quantitative easing as a “beggar-thy-neighbor” strategy of currency devaluation, called on America to learn the art of stimulus from China.

President Barack Obama has defended the Fed’s controversial program, telling the world that a fast-growing America is good for the world economy. But Mr. Stiglitz, in comments at a conference in Hong Kong on Thursday, charged that quantitative easing, by leading to a weaker U.S. dollar, in fact steals growth from other economies.

“President Obama has rightly said that the whole world will benefit if the U.S. grows, but what he forgot to mention is…that competitive devaluation is a form of growth that comes at the expense of others,” Mr. Stiglitz said at the Mipim Asia real estate conference. “So I think it is likely to present problems for the global economy going forward.”

Emerging-market nations have bristled at the Fed’s move to spur the U.S. economy by increasing the U.S. money supply. They worry it will end up instead as a tidal wave of “hot money” that will overwhelm smaller, developing economies, creating asset bubbles and inflation. To prevent that, many are establishing or strengthening capital controls, banking regulations that restrict the flow of money into and out of economies. Taiwan and Brazil are the latest to act. South Korea is also considering measures.

The foreclosure lawyers down in Jacksonville had warned me, but I was skeptical. They told me the state of Florida had created a special super-high-speed housing court with a specific mandate to rubber-stamp the legally dicey foreclosures by corporate mortgage pushers like Deutsche Bank and JP Morgan Chase. This "rocket docket," as it is called in town, is presided over by retired judges who seem to have no clue about the insanely complex financial instruments they are ruling on — securitized mortgages and laby­rinthine derivative deals of a type that didn't even exist when most of them were active members of the bench. Their stated mission isn't to decide right and wrong, but to clear cases and blast human beings out of their homes with ultimate velocity. They certainly have no incentive to penetrate the profound criminal mysteries of the great American mortgage bubble of the 2000s, perhaps the most complex Ponzi scheme in human history — an epic mountain range of corporate fraud in which Wall Street megabanks conspired first to collect huge numbers of subprime mortgages, then to unload them on unsuspecting third parties like pensions, trade unions and insurance companies (and, ultimately, you and me, as taxpayers) in the guise of AAA-rated investments. Selling lead as gold, shit as Chanel No. 5, was the essence of the booming international fraud scheme that created most all of these now-failing home mortgages.

Thursday, November 11, 2010

China is resisting pressure to become a locomotive to pull the floundering US economy out of its hole, notably by stubbornly pegging its yuan to the dollar, a senior IMF official said Tuesday.

Right now, the booming economies of emerging markets Brazil, India and China are like "rockets" being fuelled by US and European investor inflows, Nicolas Eyzaguirre, the head of the IMF's Western Hemisphere Department, told a business conference in Sao Paulo.

In return, slumping developed countries are trying "to attach ropes to those rockets to drag themselves out" of their low-growth situations, he told the event, hosted by Britain's magazine The Economist.

But "China is avoiding being caught by the rope," Eyzaguirre said, pointing specifically to Beijing's policy of keeping its currency in line with the sliding US dollar.

The currency issue is the headline topic of a G20 summit in South Korea later this week.

Brazil has voiced the anger felt by several countries over a "currency war" seen being waged between the United States and China, in which their monies are being devalued to secure an export advantage at the expense of other nations.

A fellow speaker at the conference, Alfonso Celso Pastore, a former head of Brazil's central bank said the US government had little option but to print money, as it was doing, to devalue the dollar and hope for an export-driven recovery.

Wednesday, November 10, 2010

Cities and states have had to pay Wall Street firms $4 billion since 2008 to get out of complicated interest rate deals that went sour, Bloomberg reports.

After more than a decade of selling deals that were supposed to help local governments fund public projects, banks and insurance companies are now raking in payments as already-strapped cities and states try to exit the agreements. According to Bloomberg's investigation, the payments, to exit a total of more than $500 billion worth of deals, have soared to over $4 billion. They come at a time when states face budget shortfalls of about $72 billion, according to the National Conference of State Legislatures.

The deals, called interest rate swaps, are designed to allow a borrower (in this case, the local government) to pay a low and consistent rate of interest on their debt. What once seemed attractive, though, is now corrosive: In the wake of the financial crisis, Wall Street firms failed to uphold their end of the bargain and weren't able to cover the governments' interest payments, Bloomberg reports. The governments want out, and it's costing them dearly. In New York, for instance, the state initially saved about $203 million from the swaps, but it has now paid about $247 million to exit, Bloomberg says.

After making some very unwelcome advances calling for a return to the gold reserve, World Bank head Robert Zoellick is again back, and refuses to shut up. The FT reports that earlier Zoellick said the increasing use of gold as a monetary asset was an “elephant in the room” that was being ignored by policymakers in the debate over how to correct global trade and fiscal imbalances. It gets worse: during a conference presentation, Zoellick said the price of gold indicated that the world was heading towards a new monetary system in which the US dollar would be only one of a number of reserve currencies with flexible exchange rates. As we highlighted yesterday, a variety of factors have already conspired to make it appears that not the dollar, but the Chinese currency is increasingly starting to act as a reserve currency on its own merit.

This high-end Android smartphone builds on the Fascinate with the addition of a unique secondary touch display below the main display with status info, activated by gripping the phone. Other features are similar to the Fascinate, including fast 1 GHz processor, and 5-megapixel camera with LED flash and video capture. Other features include Bluetooth 3.0, Wi-Fi with DLNA streaming, and a 3.5mm audio jack.

China will force banks to hold more foreign exchange and strengthen auditing of overseas fund raising, stepping up efforts to curb hot-money inflows that may inflate asset bubbles and add pressure for a stronger yuan.

The State Administration of Foreign Exchange will introduce new rules on currency provisioning and tighten management of banks' foreign-debt quotas, the regulator said in a statement on its website today. The government will also regulate Chinese special-purpose vehicles overseas and tighten controls on equity investments by foreign companies in China, it said.

The measures underscore concern around the world that the U.S. Federal Reserve's expanded monetary stimulus will cause capital to flood into emerging markets. The yuan rose today by the most since the end of a dollar peg in 2005 as global leaders prepare to discuss currency tensions and the impact of the Fed's easing at the Group of 20 summit this week in Seoul.

"Some international funds will flee from dollar assets because of the Fed's easing, and China's SAFE is trying all means to plug loopholes in possible channels for hot-money inflows," said Zhao Qingming, a senior analyst at China Construction Bank Corp. in Beijing, the country's second-largest lender.

The yuan jumped 0.51 percent to 6.6440 per dollar as of 6:08 p.m. in Shanghai, bringing gains this year to 2.7 percent, according to the China Foreign Exchange Trade System. Twelve-month non-deliverable forwards were at 6.4463, reflecting bets the currency will strengthen 3 percent in one year.

Nouriel Roubini, the star economist whose gloomy forecasts have earned him the nickname of Dr. Doom, is at it again.

This time he has taken to Twitter to predict pain. The New York University professor was reacting to a report by Laurie Goodman, senior managing director at Amherst Securities, who says one in five distressed homeowners in the U.S. faces, or may face, foreclosure, Housing Wire reports.

She says 11.5 million home loans are non-performing or highly distressed at present.

And Roubini says that spells trouble. “Amherst Securities Goodman estimates that 11.5 million households could default on their mortgages, not the 4 million priced in by markets,” he tweets.

“If 11.5 million more households default on their mortgages, most U.S. banks would be insolvent again. That's why Goodman's estimates are scary.”

The Fed's moves last week have provoked sharp criticism from Germany and other major exporting nations, exposed fault lines within the central bank itself and even drawn Sarah Palin, former vice presidential nominee turned media sensation, to expound on monetary policy.

Speaking at a news conference in New Delhi with Indian Prime Minister Manmohan Singh, Obama stressed that the Fed acts independently from his administration but left little doubt that he has Chairman Ben S. Bernanke's back.

"The Fed's mandate, my mandate, is to grow our economy. And that's not just good for the United States, that's good for the world as a whole," Obama said Monday. "The worst thing that could happen to the world economy . . . is if we end up being stuck with no growth or very limited growth. And I think that's the Fed's concern, and that's my concern as well."

The Fed said last Wednesday that it will buy $600 billion in Treasury bonds over the next eight months in a bid to boost the sluggish recovery by expanding the money supply. The action, known as quantitative easing, is intended to lower long-term interest rates for mortgages and other loans, boost the stock market, and increase inflation to be nearer to the 2 percent level the Fed unofficially targets.

China just metaphorically flipped off the US, and the G-20, by not only beating trade expectations, but trouncing them, with a net positive trade surplus of $27.1 billion, compared to estimates of $25 billion. This was the second highest number since January 2009, and lower only to July's $28.7 billion. The main reason for the surge in exports was the trade balance with the EU, which at $14.5 billion is the highest since October 2008. In other words, Europe's strong currency is already impacting the continent's economic output, as end users opt to import stuff from China, instead of having it produced domestically, and not to mention stockpiling inventory in hopes that pricing power will allow prices to go up (instead of just squeezing margins even more). Ultimately, Europe is the one that is now getting hit by a double whammy of the CNY-USD peg (as the CNY is now at very low levels to the euro), as well as the recent surge in the EURUSD, due to the Fed's policies. Therefore, Europe has to continue battling not one monetary regime, but two, as its net trade balance with both the US and China are getting worse by the month. As for the all important Chinese trade balance with the US, it came flat with September, both at $18 billion, even though both imports and exports declined proportionally. Elsewhere, and possibly in anticipation of increasing inflation dangers and overheating, but still unwilling to depeg from the USD, Bloomberg reports that China has ordered some banks to raise reserve ratios by another 50 bps. This will be the second such move in under a month - last time it was another 50 bps move to 17.5%. Of course, this is no different than putting a cork in the proverbial dam.

Monday, November 8, 2010

U.S. President Barack Obama defended the Federal Reserve's policy of printing dollars on Monday after China and Russia stepped up criticism ahead of this week's Group of 20 meeting.

The G20 summit has been pitched as a chance for leaders of the countries that account for 85 percent of world output to prevent a currency row escalating into a rush to protectionism that could imperil the global recovery. [ID:nSGE6A703T]

But there is little sign of consensus.

The summit has been overshadowed by disagreements over the U.S. Federal Reserve's quantitative easing (QE) policy under which it will print money to buy $600 billion of government bonds, a move that could depress the dollar and cause a potentially destabilising flow of money into emerging economies.

"I will say that the Fed's mandate, my mandate, is to grow our economy. And that's not just good for the United States, that's good for the world as a whole," Obama said during a trip to India.

"And the worst thing that could happen to the world economy, not just ours, is if we end up being stuck with no growth or very limited growth," he said.

European Central Bank President Jean-Claude Trichet said all participants at a meeting of the world's central bankers in Basel, Switzerland had insisted they were not pursuing weak currency policies.

On the even of the G20 Summit, World Bank Chief Robert Zoellick has what will be a much-talked-about op-ed in the FT regarding the topic du jour: the currency war.

In it he lays out multiple ideas including a specific plan for yuan appreciation, an end to unilateral currency interventions, a focus on growth via "supply-side-bottlenecks (i.e. structural adjustment), and perhaps most surprisingly: gold.

The system should also consider employing gold as an international reference point of market expectations about inflation, deflation and future currency values. Although textbooks may view gold as the old money, markets are using gold as an alternative monetary asset today.

He doesn't go much further down the road on this idea, and it doesn't sound like a truly hard gold standard, but rather that the world would respect gold as the ultimate arbiter of a currency's value, as a measure of who is failing to keep their currency stable.

Sunday, November 7, 2010

America is now isolated and the rest of the world is furious. The widespread use of capital controls and even a lurch into 1930s-style protectionism are both far more likely than just a few days ago.

The Federal Reserve's words may have been anodyne. "We will adjust the programme as needed to best foster maximum employment and price stability," said the US central bank's Open Market Committee. But by announcing another round of "quantitative easing", America is rightfully incurring the wrath not only of the emerging giants of the East, but the eurozone too.

The US had hoped China would use the forthcoming G20 summit in Seoul to accept America's proposal that net exporters should limit their current account surpluses to 4pc of GDP. Any prospect of that is now gone.

In the aftermath of the Fed's QE2 announcement, rather than agreeing to measures that would ease pressure on the US economy, China gave the States a public tongue-lashing. Measures to cap trade surpluses would "hark back to the days of planned economies", said Cui Tiankai, who will be one of China's lead negotiators in Seoul.

"We believe a discussion about a current account target misses the whole point, not least because if you look at the global economy, there are many issues that merit more attention – such as quantitative easing".

Saturday, November 6, 2010

Unbridled printing of dollars is the biggest risk to the global economy, an adviser to the Chinese central bank said in comments published on Thursday, a day after the Federal Reserve unveiled a new round of monetary easing.

China must set up a firewall via currency policy and capital controls to cushion itself from external shocks, Xia Bin said in a commentary piece in the Financial News, a Chinese-language newspaper managed by the central bank.

"As long as the world exercises no restraint in issuing global currencies such as the dollar -- and this is not easy -- then the occurrence of another crisis is inevitable, as quite a few wise Westerners lament," he said.

Li Daokui, another academic adviser to the central bank, said loose money in the United States would translate into additional pressure on the Chinese yuan to appreciate. "A certain amount of capital will flow into China, either through Hong Kong or directly into the mainland," Li said.

What is unnerving to our eyes is the likely continued rise in food and energy prices, unless QE2 is reversed. This chart courtesy of Casey's Daily Despatch shows how much the basic ingredients for households have risen so far this year. As we said in a previous note what the Fed gives with one hand it takes away with another, but, this time, to hurt the very households that the Fed is supposed to help.

Under current Ponzi related conditions, we should recognise the futility of economic forecasting. Instead we should focus on the more secure knowledge that bubbles always burst and that following severe financial crises, economic growth is slow until debt is expunged from the system.

Bubbles have rest periods. At some point, markets will have run their course for the time being and this might well be in early 2011, from which declines in equity and commodity markets should be experienced.

This will be followed by that last sharp move up in these markets, which we have been forecasting with copper going to $12,000 or even higher. Such a price won't be driven by real fundamentals as we keep saying, but by financial markets. Speculation will be rampant probably even more than it is today, being part of the bubble environment.

Whether the bursting of the financial asset bubble will be late next year or a year or so later is anyone's guess. It will herald in real deflation and sharply falling asset prices with copper falling below US$1500 by 2016. In short, what has changed in our forecasts is not the big picture but the short-term timing.

Friday, November 5, 2010

How was the international reaction to the Fed's massive quantitative easing plan? Decidedly not good.

The Fed's program, in which it will buy up to $600 billion in new U.S. debt (as a part of a $900 billion plan, as HuffPost's Shahien Nasiripour reported), has been criticized by foreign leaders as potentially damaging to the world economy. "With all due respect, U.S. policy is clueless," Germany's finance minister, Wolfgang Schaeuble, said Friday, according to Reuters.

Although he didn't go into much detail, Schaeuble said the issues that the Fed's policy attempts to address are not the country's fundamental problems. Quantitative easing is designed to lower interest rates: It makes the yield on Treasury bonds go down, and then lower rates spread, in theory, to the rest of the economy. In Schaeuble's words, it promotes liquidity, or the ease with which money moves around. It also promotes inflation, which, like low interest rates, theoretically encourages people to spend money now.

"With short-term interest rates already about as low as they can go, the FOMC agreed to deliver that support by purchasing additional longer-term securities," Fed Chairman Ben Bernanke wrote in a recent op-ed.

The blog Zero Hedge provides a helpful metaphor for understanding what, in its opinion, the Fed is doing: "Our Government Is Like a Plumber Trying to Fill the Bathtub by Pouring in More and More Water ... Without Plugging the Drain."

Europe's central bank issued an implicit criticism of Bernanke's policy when ECB head Jean-Claude Trichet decided he would not follow suit. And although French finance minister Christine Lagarde didn't complain outright, she doesn't seem happy with the Fed's move.

However, the Fed's plan has weakened the dollar further pushing up Asian currencies and heigthening the risks of a currency war. South Korea, Brazil and Indonesia among others have intervened unilaterally in recent weeks to curb the rise in their currencies.

The weakening greenback has prompted warnings of a wave of protectionism and capital control measures by Asian nations to stave off so-called hot money, potentially inflaming tensions ahead of next week's Group of 20 summit in South Korea.

Xia Bin, a member of the Chinese central bank's monetary policy committee, branded the stimulus plan "abusive" and warned it could spark a new global downturn.

"If there is no restraint in issuing major global currencies such as the US dollar, the occurrence of another crisis is inevitable," he said in a Beijing News report.

He called on developing countries to impose capital control measures to "prevent hot money inflows from impacting their economy".

The Bank of Korea warned that inflows of foreign cash had gathered pace in recent months but could abruptly change direction.

Monday, November 1, 2010

"But taxes, the Basel capital requirements, special arrangements for systemically important financial institutions and enhanced resolution procedures all have drawbacks and are unlikely to do the job perfectly."

This leads him to a list of much more radical proposals.

1. Forcing the riskiest banks to hold capital "several times the magnitude" of requirements at present. 2. The Volcker rule-style enforced breakup of banks into speculative and non-speculative arms. 3. The "Kotlikoff proposal", which forces banks to match each pool of risks with a requisite amount of capital, preventing losses in one spilling over into another. 4. Stunningly, Mervyn King imagines the "abolition of fractional reserve banking":